CONSOL Energy Takes Next Step in Its Growth Plan

CONSOL Energy (NYSE: CNX) made its shift toward gas obvious when it sold half of its coal assets back at the end of 2013. Since then, the company continued with its plan to grow its gas production at an annual rate of 30% while continuing with the monetization of non-core assets. The announcement of plan to form an MLP that will provide midstream gathering services for production from the Marcellus Shale is another logical step in CONSOL Energy's plan.

Monetization continuesCONSOL Energy and Noble Energy (NYSE: NBL) own a 50/50 joint venture in the Marcellus Shale. Noble Energy operates the wet gas development area while CONSOL Energy operates the dry gas area. What's more, both companies own equal shares in CONE Gathering, which will be transformed into MLP. Companies expect to proceed with the IPO of common units of the newly formed MLP late in the third quarter or early in the fourth quarter of 2014.

CONSOL Energy also has a joint venture with Hess (NYSE: HES) in the Utica Shale. This joint venture is of a smaller size than the joint venture with Noble Energy. Last year, CONSOL Energy and Hess drilled 24 wells in the Utica, while CONSOL Energy and Noble Energy drilled as much as 117 gross wells in the Marcellus Shale. Unlike in the Marcellus shale, CONSOL Energy and Hess do not own gathering services in Utica and rely on third parties for gathering services. That said, both CONSOL Energy and Hess plan to monetize approximately 62,000 acres of joint venture Utica shale acres.

The monetization of non-core Utica acres is a part of CONSOL Energy's plan to monetize as much as $1 billion of non-core assets over the next five years. This will help the company reach its target to stay within its cash flows while growing its production. The money will be going toward CONSOL's gas business, which is expected to provide 53% of estimated EBITDA in 2014. To reach targeted growth, the company is dedicating as much as 74% of this year's capital spending toward its gas segment.

What about coal?CONSOL Energy states that its coal segment is going into maintenance of production mode, as the company bets on bigger shift from coal to gas in energy generation. Does it mean that CONSOL Energy will get rid of the remaining coal assets? This scenario seems unlikely.

Despite a tough market environment, coal remains an important contributor to the company's cash flows. Earlier this year, CONSOL Energy raised its annual coal production guidance range from 30.1 million-32.1 million tons to 31 million-33 million tons. This means that the company will be operating closer to its annual production capacity, which consists of 32 million tons of thermal coal and 5.2 million tons of met coal.

The mines in CONSOL Energy's current portfolio have solid reserves and long mine life. As long as they stay cash flow positive, they are unlikely to be divested. What's more, when the met coal market recovers from the current extreme state, CONSOL Energy will enjoy an earnings boost from its Buchanan met coal operations.

Bottom lineCONSOL Energy's shares have been performing well this year, as the market endorses the company's growth prospects. As CONSOL Energy continues to execute against its strategy, its shares are likely to remain among solid performers.

Do you know this energy tax "loophole"?You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.